States Leading the Way on Taxes

“from 2002 to 2012, 62 percent of the 3 million net new jobs in America were created in the nine states without an income tax, though the states account for only about 20 percent of the national population.”

States Spark Real Tax Reform

While President Obama and Members of Congress use the promise of tax reform as a throwaway speech line, there is real action on tax reform in states across the nation.

Currently only nine states have no income tax – – Alaska, Florida, New Hampshire, Nevada, South Dakota, Texas, Washington, and Wyoming. But the list is growing as states seek to reduce or eliminate the income tax in pursuit of economic expansion and job growth.

In a summary of tax reform at the state level, the Wall Street Journal noted that Oklahoma and Kansas already have lowered income tax rates with an eye towards eliminating the tax altogether. Meanwhile, newly elected governors in Indiana and North Carolina have advocated cuts in the state income tax. The governor of Ohio joined the parade this week.

Other governors – – Heineman of Nebraska and Jindal of Louisiana – – want to do away with the state income tax entirely with no stops along the way for incremental reductions. Both want to replace the income tax with a comprehensive sales tax.

The Journal pointed out that the sales for income tax swap makes sense. “Income taxes generally do more economic harm because they are a direct penalty on saving, investment, and labor that create new wealth. Sales taxes, by contrast, hit consumption, which is the result of that wealth creation.”

Data indicates that states with low income tax rates or no income tax at all do far better economically than states with income tax rates that exceed 10 percent. The Journal cited a recent analysis by economist Art Laffer who reported that “from 2002 to 2012, 62 percent of the 3 million net new jobs in America were created in the nine states without an income tax, though the states account for only about 20 percent of the national population.”

States are always engaged in intense competition for new businesses that will create jobs. When the winners create new jobs, they create new taxpayers, and the ones that resist the temptation to ding their new taxpayers show widespread prosperity.

Taxpayers and businesses alike are voting with their feet and fleeing high tax states such as California, New York, and Illinois. These high-tax states and others are fiscal disasters. Also, witness the influx of such businesses as foreign automakers to low tax states. These businesses and their new employees are welcomed rather than penalized as soon as they go to work.

Competition between the states is even more intense considering the advantage held by right to work states. Largely located in the South and the West, right to work states also put out the welcome mat to new businesses and their employees. Resistance to right to work laws is a relic of the most intense battles between unions and management. Only last year two states – – Indiana and Michigan – – joined the ranks of right to work states.

Most startling was the change in Michigan, the cradle of organized labor and the nation’s highly unionized auto industry under the United Auto Workers. One can only wonder what Walter Reuther and James Hoffa would say about this seismic shift.

Unlike our elected leaders in Washington, governors live every day with spending restraints. Every state but one (Vermont) requires a balanced budget by either state constitution or statute. Governors need to fund education, infrastructure, and pensions under intense fiscal pressure. The political landscape is littered with one-term governors who could not handle it.

Most daunting of all, governors need to manage and fund their states without the luxury of a printing press in the basement of the state capitol, ready to crank out more and more money to supplement borrowing and taxing.

The states are leading the way to tax reform. Rest assured that millions of voters know that the real tax cutters are hard at work in their state capitals, while the procrastinators sit idly by in Washington.

John Walker is a long time observer of American politics with experience in journalism, government, and public affairs.

During the course of his career, Walker has worked in Chicago, Washington DC, New York City, and Phoenix. He served as a reporter in Chicago, a press secretary and speechwriter in Washington, and in numerous positions in New York in corporate and financial services communications.

Walker is a graduate of the University of Wisconsin and the Medill School of Journalism at Northwestern University.